Authorities in Asia are cracking down on digital lenders and taking the reins of a sector that has advanced with little supervision in large credit-hungry economies such as India and Indonesia.
Easy loan applications and websites have proliferated in India and Southeast Asia, where hundreds of millions of people cannot access the formal credit system. In India, 190 million people did not have bank accounts in 2017, according to the World Bank, along with 95 million in Indonesia.
But officials have struggled to control the fast-growing sector. While many applications are licensed, thousands operate illegally. They are known to prey on consumers with limited financial knowledge by charging exorbitant interest rates and collecting data from phones, which are used, for example, to embarrass debtors by calling family members.
Trying to police illegal online loan applications is like playing “a game of Whac-A-Mole,” said Niki Luhur, president of the Indonesian Fintech Association, who said the “bad apples” keep coming.
The Reserve Bank of India established a panel last month to strengthen oversight of the sector. Growing public alarm over the proliferation of hundreds of these apps, whose aggressive tactics were linked to a string of suicides, also prompted investigations and arrests by Indian police.
Google, which faced criticism in India for hosting the apps, also said last month that it was removing non-compliant ones from its app store.
“From the way it’s growing, obviously there is a need to bring some regulation or sanity to the market,” said Anuj Golecha, an angel investor in Mumbai who has invested in about a dozen fintech companies, including lenders.
The Indonesian Financial Services Authority (OJK) has also stepped up its regulatory efforts. It drew up draft proposals late last year to tighten existing rules by increasing paid-up capital requirements and requiring more frequent board meetings.
You can also force online lenders to raise funds from offshore investors who are already involved in the financial services sector.
The OJK had already taken steps to curb illegal apps and lenders, working in 2019 alongside other ministries to block or ban hundreds of entities.
But the prospect of a broader crackdown has sparked frenzied lobbying by regulated fintech companies and their investors, who worry they will turn into collateral damage.
“The RBI and the government will do everything possible to protect the consumer. I just hope they don’t go so far as to kill the proposal, ”said Upasana Taku, co-founder of Sequoia-backed Indian fintech company MobiKwik, which offers consumer loans.
Eddi Danusaputro, chief executive of Mandiri Capital Indonesia, the venture capital arm of Bank Mandiri, the country’s largest state bank in terms of assets, said more regulation was “a good thing.” Mandiri Capital has backed a number of local loan startups.
But he cautioned that some of the requirements proposed by OJK were “too stringent” and could stifle a crucial industry, citing as an example the jump in required paid-up capital.
The steps follow a crackdown on the fintech industry in China, where the rise of online consumer loans spawned a thriving culture of fintech apps, such as peer-to-peer lenders.
Beijing cracked down on the P2P industry in 2018, suspending the issuance of licenses for new lenders. More recently, it has also hampered local fintech players like Ant Group, a dominant force in consumer lending on the continent. The company’s initial public offering was rejected by regulators last year when authorities emphasized the need to regulate fintech.
That crackdown, in turn, led Chinese operators to close their local market to establish themselves in another part of Asia. A 2018 OJK report found that half of the 227 unlicensed P2P lenders in Indonesia originated in China. Analysts in India say that many of the illegal apps are also run indirectly from China.
Akshay Garg, CEO of fintech startup FinAccel, which operates the Kredivo credit loan app in Indonesia and has more than 2 million clients, said the situation has improved with increased police surveillance from OJK, but that “there was no easy solution.”
“Unless there is a deep level of cooperation between technology companies and governments to initiate more proactive surveillance of app stores, not much can be done,” Garg said. “And technology companies around the world have taken a hands-off approach to online surveillance.”
Many of the applications, most of which are Chinese, are simply “functional mathematics,” he said. “They don’t need to worry about the 10 percent of borrowers who default. They charge an interest rate so high that 90 percent that covers more than the 10 percent you lost. “
Officials and executives alike agree that digital lenders can help address chronic credit shortages for the region’s young and fast-growing population, a need that has only increased during the pandemic.
However, in India, even legitimate digital lenders have so far operated in a kind of gray area. They are not directly supervised by the authorities, but must partner with an RBI accredited non-bank financial company, although some obtain an NBFC license themselves.
The Indian FinTech Association for Consumer Empowerment, an industry body, is looking to get ahead of heavy-handed intervention by lobbying the RBI for a self-regulatory model. He has proposed a set of best practice standards, such as putting limits on the data that can be collected from a borrower’s phone.
“The impact of a reckless and unregulated ecosystem could be dire,” said Akshay Mehrotra, CEO of the startup EarlySalary and founder of FACE. “Apprenticeships are quite common in both China and Indonesia. The loan process must be transparent. “
Ashish Fafadia, a partner at India’s Blume Ventures, which has invested in several fintech lenders, said he believed a tighter regulatory leash was inevitable and would ultimately serve the interests of the industry.
“I can’t imagine that we will be able to grow with ad hoc planning and systemic expansions every 10 to 20 years,” he said. “You need to have an architecture that is transparent and immunized.”